Charles Read, CPA, USTCP, IRSAC
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President Trump signed an executive order on August 8, 2020, to let employees defer their social security tax payment from September 1, 2020 – December 31, 2020. The key here is this only a deferral and not forgiveness of taxes owed. Just like other programs rolled out earlier this year, there was no clarity on how this payroll tax deferral would be implemented. On August 28th, the IRS issued some further guidance and in a nutshell, it’s a mess.
Starting September 1, employees who elect to defer their payroll taxes can see an increase in their take-home pay but what they should be aware of is that they are still on the hook for these taxes which they will need to pay back through extra withholding between Jan 1, 2021 – April 30, 2021.
Employers are allowed to defer withholding, deposit, and payment of the employee’s portion of Social Security tax on wages that are less than $4,000 during a bi-weekly pay period. Each pay period is to be considered separately, and no deferral is allowed for any payment to an employee of taxable wages of $4,000 or more for a bi-weekly pay period. Technically the requirement to deposit employee Social Security tax does not occur until the tax is withheld; thus, by postponing the withholding of the employee Social Security tax, the deposit obligation is delayed.
The employer is responsible for the repayment of these taxes. There is no clarity on how the employer will be able to collect these dues should the employee leave them before May 1,2021. Our advice to all employers is to avoid this program if possible as there is a substantial risk of loss.
Another potential issue is due to the lack of guidance payroll software companies as of last week. They do not know how to code this into their system. I suspect it will take months before they are able to roll this out to everyone. Then there is the problem of revising Form 941 as well as the Form W2 and Form W3. If the employer is unable to recoup the deferred taxes and thereby unable to deposit them who will be responsible for the penalties and interest. At the moment it looks like you the employer will be responsible.
If you are an employer, consider steering clear of this program as it really shifts the burden of collecting and reporting on your shoulders. We suspect there will be more guidance coming soon but for now, stay put.
If you have any additional questions, please feel free to contact us at 972-353-0000